Doing business with China

06 August 2015

After years of reporting double digit GDP growth, there is talk of China’s economy slowing down. Projections for Chinese GDP growth in 2015 may only be 7%, but this still compares favourably with IMF predictions of 3.5% annual growth rates for the global economy.

The reduced levels of growth have followed a period of economic reform in which the government has sought to reduce the nation’s dependence on low-cost manufacturing. Favourable tax policies have been aimed at attracting technology companies and R&D centres amongst others. There has also been a broadening of the scope of categories in the Foreign Investment Catalogue in which foreign investment is permitted or encouraged. This has done much to continue attracting foreign investment in new sectors that add to the diversity of the economy.

Foreign direct investment into China is projected to quadruple over the coming six years. Recent reports in the national press highlight the expectation that the UK’s share of this is likely to increase above its current levels - at the same time as the overall levels of FDI continue to grow.

Whilst UK growth rates fare better than much of mainland Europe, the potential opportunities deriving from doing business in or with China are not to be ignored. It is not only the larger corporations that should seek to take advantage of the growth opportunities. Within the manufacturing sector, there remains a strong need for specialist component suppliers to follow their customers around the world. As foreign investment continues to increase, there will be increasing demands for international education, healthcare and other professional services.

As business leaders, however, readers may be concerned about the perceived levels of risk. It would certainly be irresponsible to follow the crowd to invest in any other country without performing an in-depth analysis of the expected risks and rewards. Entering the Chinese market should be no exception. Here are some areas that should be included in a good business plan:

1.  Corruption

The recent coverage of the FIFA scandal may make us believe that corruption is something that only happens abroad. It should also, however, remind us of the legal environment in which we all work. It may have been the American Foreign Corrupt Practices Act (FCPA) that initially highlighted the alleged misdemeanours of numerous FIFA officials, but the UK Bribery Act 2010 also clearly places a responsibility on British businesses to refrain from bribing foreign officials and to prevent third parties engaging in bribery on its behalf.

It is not only at home that you need to take care. Recent probes into corruption in public life have highlighted the established behaviour of a number of former ministers. Senior management in much of the state-owned sector of the economy has been subject to investigation. It was also widely reported that a foreign pharmaceutical company had been fined US$ 0.5bn for paying bribes to doctors and hospitals in order to promote their products.

It may seem like doing business the local way, but regulations around the world are making it harder to claim that ‘corruption pays’.

2.  Intellectual Property Rights (IPR)

Piracy of intellectual property has long been associated with emerging markets such as China. It has often been perceived that the courts would generally find in favour of local defendants rather than recognising the validity of foreign plaintiff’s actions. There has been a trend over recent years, however, for strengthened enforcement of IPR. Companies that enter the China market should seek specialist legal advice early on to ensure that their IPR is properly registered at the outset rather than seeking assistance to perform rectification at a later date.

3.  Business practices

Business practices often appear widely divergent from those expected by foreign investors. This applies not only in the areas of corruption and IPR, but also with regard to many daily functions within an organisation. It is important to note that translation alone is insufficient to ensure that local staff and investor understand each other. It is really important to fully understand how people think on either side of a national border. Many British businesses may have some experience dealing with other countries within Europe, but it is a large step from the continent of Plato and Aristotle to the continent of the “Hundred Schools of Thought” and Confucius. The organisations that invest in developing their local staff as well as maintaining a sufficient degree of oversight are the most likely to succeed.

4.  General compliance

Tax and regulatory filings and even employment can seem quite bureaucratic. Company seals are very important and can be used to transfer money. Safe custody of seals is therefore very important and may be best effected by a third party service firm (lawyers or accountants) if the manager from the head office cannot read Chinese documents. Companies first entering the Chinese market are likely to need assistance with the compliance functions whilst they develop their market presence. The primary objective of entering the market should, after all, be to develop a business that can grow and not to spend time on compliance issues.

5.  Investment structure

Historically many British companies have entered China via Hong Kong. Singapore has also been a strong regional centre for many international groups. The location of an intermediate holding company will not in itself change the way that dividends are taxed, but may influence the future repatriation of profits. A more important consideration for location of an intermediate holding company is often the use of international arbitration for contracts and the presence of a reliable court system. Investment structure is therefore an area that will require both legal and tax advice.

6.  Take advice

Whilst each of the previous sections has stressed the need to take advice, it is worth repeating. Organisations such as UK Trade and Investment and the China Britain Business Council provide a wide range of information about market entry. It is also worth consulting peers and customers to learn from their experience. There are likely to be significant areas within your China plans that will need specialist legal and accounting advice.

The risks may be there, but so too are the potential rewards.

About the Author:

Mark Wilson is an audit and business advisory partner with MHA MacIntyre Hudson, based in the Reading and City offices. He specialises in advising internationally active clients with regard to cross border accounting, control and compliance issues. He is a Chartered Accountant with 12 years experience providing audit and advisory services in China to a wide range of European and American clients.